Interesting study re credit card fees and rewards

[Bob78164]

According to this story, a study conducted by the Federal Reserve Bank of Boston has concluded that credit card fees and reward programs end up transferring wealth from those with less money to those with more.

This occurs because merchants hike their prices to cover the fees charged to them by credit card companies. Credit card users, who are more likely to be wealthier, get rebates, but cash payers, who are more likely to be less wealthy, do not. --Bob

[Thousandaire]

So that's why I'm not rich.

[FannytheBull]

According to this story, a study conducted by the Federal Reserve Bank of Boston has concluded that credit card fees and reward programs end up transferring wealth from those with less money to those with more.

This occurs because merchants hike their prices to cover the fees charged to them by credit card companies. Credit card users, who are more likely to be wealthier, get rebates, but cash payers, who are more likely to be less wealthy, do not. --Bob

I would think the opposite. Less wealthy people don't have the ready, so they use credit cards.

I am poor and use credit cards as exclusively as I can to get all the cashback rebates I can, because every penny helps....

[MarleysGh0st]

Who most often uses credit cards is open to debate. But, IIRC, the rules of the credit card companies state that they can't charge customers extra for using cards, nor can they offer discounts to those paying cash. (I don't know how gas stations can make an exception to that. Maybe it's just a very common custom among other retailers.) Therefore, those who pay cash--whatever economic group they're from--are subsidizing those who use a card.

[wintergreen48]

Who most often uses credit cards is open to debate. But, IIRC, the rules of the credit card companies state that they can't charge customers extra for using cards, nor can they offer discounts to those paying cash. (I don't know how gas stations can make an exception to that. Maybe it's just a very common custom among other retailers.) Therefore, those who pay cash--whatever economic group they're from--are subsidizing those who use a card.

You are correct that the rules (and some state laws) generally provide that a merchant cannot charge someone more for using a credit card, however, the rules (and all state laws of which I am aware) do allow merchants to offer a discount for cash. That is precisely why the gas stations who offer cash discounts do it the way they do (although if you audited them really carefully, when they are offering the '5 cents off per gallon for cash' deals, you will probably find that, immediately before the 5 cent per gallon cash discount goes into effect, they raised their prices by, oh, about 5 cents per gallon; the local stations around here who offer cash discounts all have base prices that just happen to be 5 cents per gallon higher than the base prices of the stations that do not offer discounts for cash).

[silverscreenselect]

Who most often uses credit cards is open to debate. But, IIRC, the rules of the credit card companies state that they can't charge customers extra for using cards, nor can they offer discounts to those paying cash. (I don't know how gas stations can make an exception to that. Maybe it's just a very common custom among other retailers.) Therefore, those who pay cash--whatever economic group they're from--are subsidizing those who use a card.

The liquor store where I usually go offers about a 2% cash discount. They have two prices posted for every bottle, a "special" cash price (say $9.75) and a regular (ie, credit/debit) price (say $9.99).

[MarleysGh0st]

(although if you audited them really carefully, when they are offering the '5 cents off per gallon for cash' deals, you will probably find that, immediately before the 5 cent per gallon cash discount goes into effect, they raised their prices by, oh, about 5 cents per gallon; the local stations around here who offer cash discounts all have base prices that just happen to be 5 cents per gallon higher than the base prices of the stations that do not offer discounts for cash).

If that's so, then won't their price for credit card users be 10 cents higher than for those who do not offer the cash discount?

And how is it that more retailers do not offer a cash discount?

[wintergreen48]

According to this story, a study conducted by the Federal Reserve Bank of Boston has concluded that credit card fees and reward programs end up transferring wealth from those with less money to those with more.

This occurs because merchants hike their prices to cover the fees charged to them by credit card companies. Credit card users, who are more likely to be wealthier, get rebates, but cash payers, who are more likely to be less wealthy, do not. --Bob

News stories have a habit of not reporting things entirely accurately, not necessarily because of any real bias (although there is often a lot of that), but because the reporters often do not understand what they are reporting. There is a line in this story that simply makes no sense:

They found that about 83 percent of banks' revenue from credit card fees is obtained from cash payers "and disproportionately from low-income cash payers."

I am not a math genius, but I do have some experience in the credit card business, and frankly, I do not see how a bank can possibly make 83% of its revenue from credit card fees from cash payers-- cash payers do not pay credit card fees. That might perhaps be a reference to the interchange fee, but that is not a credit card fee; if that is what they mean, they should report it.

But even if that is what they mean, it is simply not correct. Banks have historically made TONS of money off of the direct credit fees-- late fees, overlimit fees, cash advance fees, balance transfer fees, annual membership fees, etc.-- absolutely none of which are paid by cash payers-- they are directly related to the transactional use of a credit card. As it happens, those fees are almost entirely paid by people with crappy credit: people with good credit generally have credit cards that do not involve paying an annual membership fee (unless they have some special Rewards cards, some of which do have an AMF that essentially covers the cost of the rewards), and people with good credit do not pay late (thus they do not pay late fees), they do not go overlimit (thus they do not pay overlimit fees), they do not take cash advances (thus they do not pay cash advance fees), and the only time they transfer a balance is when they are moving something like a car loan to a 0% card, with no BT fee; the fee structure on credit cards does in fact impact people with lousy credit much more than people with good credit, but people with lousy credit, as a group, are not necessary 'poor' people, they are just people with lousy credit (demographically, the 'typical' subprime credit card customer is a white woman in her 40's with an income around $50,000/year, while the 'typical prime credit card customer is... a white woman in her 40's with an income around $50,000/year; the difference between subprime and prime and superprime is behavioral, not financial).

[wintergreen48]

(although if you audited them really carefully, when they are offering the '5 cents off per gallon for cash' deals, you will probably find that, immediately before the 5 cent per gallon cash discount goes into effect, they raised their prices by, oh, about 5 cents per gallon; the local stations around here who offer cash discounts all have base prices that just happen to be 5 cents per gallon higher than the base prices of the stations that do not offer discounts for cash).

If that's so, then won't their price for credit card users be 10 cents higher than for those who do not offer the cash discount?

And how is it that more retailers do not offer a cash discount?

No, the prices for credit card users at the discount station would be 5 cents higher than at the non-discount stations. Example: right now, around here, the basic gas price is something like $2.529/gallon... except for the discount stations, which charge $2.579/gallon, unless you pay cash, in which case you pay... $2.529/gallon. They are, in effect, penalizing credit card users, but technically they are doing it within the rules, so no one complains (those of us who use credit cards just go to the station across the street that does not charge the 'extra' 5 cents).

For most retailers, credit cards are a real boon, and playing the cash-discount game is not going to accomplish much of value. If they follow the credit card rules, they will get paid even if the card is stolen or being used by someone not actually authorized to use it (the credit card company has to eat those charges), whereas they are stuck with the loss on a bad check; and they also get the benefit of the funds more quickly on a credit card than a check, at least, in a volume business. And for large purchases they really do not want to have a lot of cash thrown at them-- cash may be king, but it is much harder, and much more risky, to handle.

And of course there are other issues to consider. Try to imagine internet commerce without credit cards: from the retailer's standpoint direct cash debits against a customer's checking account would be nice, but most banks are or will be charging fees on one side or the other for that, and worse still, the customer has no protection at all to speak of in the event of fraud (either fraud by a vendor, who collects the payment and does not deliver the goods, or fraud by someone who hijacks the account and drains it); with a credit card, the customer has essentially no liability for fraud or unauthorized use (technically, the bank may be able to hold you for up to $50 in some situations, but no bank ever does) and generally does not have to pay if he/she does not receive the goods or does not receive the correct goods or does not receive the goods in good condition.

Credit cards are good. And it is my job to make the world safe for credit cards.

[jaybee]

Of course the bottom line here is not if you are rich or poor - it's more about those who can manage their credit cards and those who don't. Almost anyone (except those who have already toasted their credit) can get a credit card. Everyone, no matter if they charge $200 per month or $30,000 per month has the option to only buy what they can afford - meaning that you can never carry a balance on your credit cards. All it takes to make credit card use a plus instead of a minus is the gumption to only buy what you have cash for no matter what. Then, you will get the benefit of rewards from using a credit card without the costs.

I know poor people in credit card trouble and I know rich people with some serious credit card problems. It's really a difference between those who can manage their credit and those who can't instead of a rich vs poor thing.

[littlebeast13]

Who most often uses credit cards is open to debate. But, IIRC, the rules of the credit card companies state that they can't charge customers extra for using cards, nor can they offer discounts to those paying cash. (I don't know how gas stations can make an exception to that. Maybe it's just a very common custom among other retailers.) Therefore, those who pay cash--whatever economic group they're from--are subsidizing those who use a card.

You are correct that the rules (and some state laws) generally provide that a merchant cannot charge someone more for using a credit card, however, the rules (and all state laws of which I am aware) do allow merchants to offer a discount for cash. That is precisely why the gas stations who offer cash discounts do it the way they do (although if you audited them really carefully, when they are offering the '5 cents off per gallon for cash' deals, you will probably find that, immediately before the 5 cent per gallon cash discount goes into effect, they raised their prices by, oh, about 5 cents per gallon; the local stations around here who offer cash discounts all have base prices that just happen to be 5 cents per gallon higher than the base prices of the stations that do not offer discounts for cash).

Where are these gas stations that offer cash discounts that you speak of? I have surely never seen one. In fact, just the opposite.... usually they drop teh price if you use a card with that company's logo on it.....

lb13

[littlebeast13]

According to this story, a study conducted by the Federal Reserve Bank of Boston has concluded that credit card fees and reward programs end up transferring wealth from those with less money to those with more.

This occurs because merchants hike their prices to cover the fees charged to them by credit card companies. Credit card users, who are more likely to be wealthier, get rebates, but cash payers, who are more likely to be less wealthy, do not. --Bob

Thanks for more ammo to get pissed off when someone's holding up the line with a five minute credit card transaction.....

And seriously.... I have never been offered a discount for paying for anything in cash outside of the mattress set I bought last year.... and that's only because the store I bought it from is shady and will not charge you the sales tax if you pay in cash.....

lb13

[littlebeast13]

And a question, as a credit card dummy..... are cash back programs with credit cards really that extensive? I always assumed they were limited to a few select cards, and that for the most part, a credit card was just a credit card. My parents and sisters used them extensively (a bit too extensively, one of the reasons I've never liked credit in the first place), and I never recall them mentioning getting cash back incentives before....

lb13

[Bob78164]

And a question, as a credit card dummy..... are cash back programs with credit cards really that extensive? I always assumed they were limited to a few select cards, and that for the most part, a credit card was just a credit card. My parents and sisters used them extensively (a bit too extensively, one of the reasons I've never liked credit in the first place), and I never recall them mentioning getting cash back incentives before....

lb13

I think they have become much more extensive in the last few years. My wife and I put the vast majority of our spending on credit cards specifically because of the cash back feature. --Bob

[wintergreen48]

According to this story, a study conducted by the Federal Reserve Bank of Boston has concluded that credit card fees and reward programs end up transferring wealth from those with less money to those with more.

This occurs because merchants hike their prices to cover the fees charged to them by credit card companies. Credit card users, who are more likely to be wealthier, get rebates, but cash payers, who are more likely to be less wealthy, do not. --Bob

Thanks for more ammo to get pissed off when someone's holding up the line with a five minute credit card transaction.....

And seriously.... I have never been offered a discount for paying for anything in cash outside of the mattress set I bought last year.... and that's only because the store I bought it from is shady and will not charge you the sales tax if you pay in cash.....

lb13

Actually, the ones who hold you up are the ones paying with checks: they usually take a LOT of time. The next longest are the ones paying cash, particularly the old ladies who do not open their purses until the entire transaction is rung up, and they have the total, and then they know they have exact change and it'll just take a moment to find those three pennies...

[wintergreen48]

And a question, as a credit card dummy..... are cash back programs with credit cards really that extensive? I always assumed they were limited to a few select cards, and that for the most part, a credit card was just a credit card. My parents and sisters used them extensively (a bit too extensively, one of the reasons I've never liked credit in the first place), and I never recall them mentioning getting cash back incentives before....

lb13

Discover has always offered cash-back rebates: the 'regular' rebate is 1/2 % on all purchases, but each quarter they have some special where they give you 3-5% back (you have to 'register' for it, it's just part of their marketing); those quarterly specials vary during the year, this quarter it is gas stations and grocery stores, I think. My Capital One card gives me 'free' miles (they are 'free' to me, the poor people are paying for it of course), which i can redeem for flights on any airline, but they also have a catalog with many wonderful gifts and prizes I can 'buy' with my miles. I also have a Bank of America card (used to be MBNA), which is not a rewards card but which I keep just because they gave me a ridulously high credit limit which strokes my ego, but this quarter they are offering huge rebates (5%) on gas, groceries, and a couple other items, I don't know why, but I'll use it to get the benefit of the bucks.

[littlebeast13]

According to this story, a study conducted by the Federal Reserve Bank of Boston has concluded that credit card fees and reward programs end up transferring wealth from those with less money to those with more.

This occurs because merchants hike their prices to cover the fees charged to them by credit card companies. Credit card users, who are more likely to be wealthier, get rebates, but cash payers, who are more likely to be less wealthy, do not. --Bob

Thanks for more ammo to get pissed off when someone's holding up the line with a five minute credit card transaction.....

And seriously.... I have never been offered a discount for paying for anything in cash outside of the mattress set I bought last year.... and that's only because the store I bought it from is shady and will not charge you the sales tax if you pay in cash.....

lb13

Actually, the ones who hold you up are the ones paying with checks: they usually take a LOT of time. The next longest are the ones paying cash, particularly the old ladies who do not open their purses until the entire transaction is rung up, and they have the total, and then they know they have exact change and it'll just take a moment to find those three pennies...

I guess it's just my luck that the credit card machine always seems to go on the fritz, or someone whose card gets rejected just always seems to be in front of me in line......

Plus, there's the awkward signature moment since there's never any good place to lay the slip down and sign it. This..... all....... takes............... time.............................................

lb13

[TheConfessor]

Cash rebates and plane tickets are nice, I suppose, but I want S&H Green Stamps.

[littlebeast13]

And a question, as a credit card dummy..... are cash back programs with credit cards really that extensive? I always assumed they were limited to a few select cards, and that for the most part, a credit card was just a credit card. My parents and sisters used them extensively (a bit too extensively, one of the reasons I've never liked credit in the first place), and I never recall them mentioning getting cash back incentives before....

lb13

Discover has always offered cash-back rebates: the 'regular' rebate is 1/2 % on all purchases, but each quarter they have some special where they give you 3-5% back (you have to 'register' for it, it's just part of their marketing); those quarterly specials vary during the year, this quarter it is gas stations and grocery stores, I think. My Capital One card gives me 'free' miles (they are 'free' to me, the poor people are paying for it of course), which i can redeem for flights on any airline, but they also have a catalog with many wonderful gifts and prizes I can 'buy' with my miles. I also have a Bank of America card (used to be MBNA), which is not a rewards card but which I keep just because they gave me a ridulously high credit limit which strokes my ego, but this quarter they are offering huge rebates (5%) on gas, groceries, and a couple other items, I don't know why, but I'll use it to get the benefit of the bucks.

OK, I forgot about the free miles, etc. stuff like that.... probably because it's something I'd never use in the first place.....

lb13

[jaybee]

And a question, as a credit card dummy..... are cash back programs with credit cards really that extensive? I always assumed they were limited to a few select cards, and that for the most part, a credit card was just a credit card. My parents and sisters used them extensively (a bit too extensively, one of the reasons I've never liked credit in the first place), and I never recall them mentioning getting cash back incentives before....

lb13

I use three credit cards.

Card #1 - A GM Master Card. It pays 5% of all purchases back - but instead of cash it's in a cash account that can be redeemed on the purchase of a new GM vehicle. The money can be used within 7 years and since I buy a new truck every 5 to 6 years I always have it on tap. Down side is that the reward is maxed out at only $500 (it used to be $1,000 many years ago). It usually takes me about 1-1/2 to 2 months to charge $10K on the GM card - Mrs. JayBee keeps track of things and tells me to put the GM card away until next year once we hit the reward limit. The card does have an annual fee but the fee is also rolled back into reward dollars so in the end costs me nothing. Since I started the program back in the mid-90's I have gotten right around $10K in money from it.

Cards #'s 2 and 3 - BP Visa card (Yeah - THAT BP!). These pay 1% on most things and 3% on fuel all the time in cash, plus there are seasonal specials where they pay double % for types of stores - restaurants, home improvement, furniture etc. There is no limit on the awards amount. We get a check in even $50 amounts - usually I get anywhere from $150 to $400 every 4 to 5 weeks. Makes for some nice unbudgeted income - Mrs. JayBee decides where it all goes.

I never carry a balance on any credit cards and never pay a dime in interest so all the rewards money is 'real' income.

[FannytheBull]

Who most often uses credit cards is open to debate. But, IIRC, the rules of the credit card companies state that they can't charge customers extra for using cards, nor can they offer discounts to those paying cash. (I don't know how gas stations can make an exception to that. Maybe it's just a very common custom among other retailers.) Therefore, those who pay cash--whatever economic group they're from--are subsidizing those who use a card.

You are correct that the rules (and some state laws) generally provide that a merchant cannot charge someone more for using a credit card, however, the rules (and all state laws of which I am aware) do allow merchants to offer a discount for cash. That is precisely why the gas stations who offer cash discounts do it the way they do (although if you audited them really carefully, when they are offering the '5 cents off per gallon for cash' deals, you will probably find that, immediately before the 5 cent per gallon cash discount goes into effect, they raised their prices by, oh, about 5 cents per gallon; the local stations around here who offer cash discounts all have base prices that just happen to be 5 cents per gallon higher than the base prices of the stations that do not offer discounts for cash).

Where are these gas stations that offer cash discounts that you speak of? I have surely never seen one. In fact, just the opposite.... usually they drop teh price if you use a card with that company's logo on it.....

lb13

Back in the day, when bank credit cards were starting to get popular to use rather than a store charge card (we're talking mid 80s), and more places started accepting bank cards, all of the gas stations started giving a 4 cent discount for cash. There was also a 4 cent discount for using their charge card (Texaco turned me down for a charge card in 1985, I have never gone to a Texaco since, even though I have a tiger tail that all the cats have loved), so it was pretty obvious that it was actually a 4 cent surcharge for using a credit card.

At some point there was a big hubbub about gas stations not legally being able to charge some people more than others (or something like that), and they all stopped it. I'm thinking that it's a law (maybe Sprots knows), but maybe it was just pressure from public outrage.....

In any event, there hasn't been a 'cash discount' for gas around here for probably a couple decades. Some stores, usually mom and pops or dollar stores, do require a minimum purchase to use a credit card, though.

[ten96lt]

At my College campus, I remember at the beginning of the Fall semester, there were a few stands offering credit cards, now they've practically disappeared. I have 3 credit cards (2 are active). 2 are with Chase (One I canceled because they wanted to raise my rate to 26% because of "economic conditions" even though I've paid them on time every month, but I still have to pay off the balance.) and one is Discover. The active Chase account is a student United Mileage Plus Visa at 16% variable, 2 miles per dollar and no fee. Ironically the best card I have is Discover, they give me 10.5% and double the credit limit of my active Chase card with no fee. Only problem with it is whenever I walk into a store, it's a crap shoot whether they take it or not. I normally use them to pay for college expenses until the student loans come through. Nice to get the miles, but gotta pay them off quick.
In regards to discounts, there's one gas station that has a "discount" for using cash, but the cash price is normally higher than a gas station that's a lot closer to me. The local Shell gives a discount if you use their gas card since it's their cash you're playing with.

[wintergreen48]

At my College campus, I remember at the beginning of the Fall semester, there were a few stands offering credit cards, now they've practically disappeared.

Among other things, the CARD Act bans credit card companies from setting up 'in close proximity' to a college campus (the Federal Reserve Board's legal staff says that 'close proximity' means 'within 1,000 feet'). Gets really interesting when you have those 'colleges' that are in office buildings, when there is an existing bank branch on the first floor. I expect there will be some litigation about that.

[Bob78164]

At my College campus, I remember at the beginning of the Fall semester, there were a few stands offering credit cards, now they've practically disappeared.

Among other things, the CARD Act bans credit card companies from setting up 'in close proximity' to a college campus (the Federal Reserve Board's legal staff says that 'close proximity' means 'within 1,000 feet'). Gets really interesting when you have those 'colleges' that are in office buildings, when there is an existing bank branch on the first floor. I expect there will be some litigation about that.

Does an office building qualify as a college "campus"? --Bob

[Thousandaire]

You are correct that the rules (and some state laws) generally provide that a merchant cannot charge someone more for using a credit card, however, the rules (and all state laws of which I am aware) do allow merchants to offer a discount for cash.

Do the people who write these laws realize there is no difference? Are they really that dense?